Transcript Slide 0
GAAP Update
OACUBO Professional Development Conference
April 18, 2011
Ohio Northern University, Ada, Ohio
Presenters
David M. Andrews, CPA
Partner
Cleveland, Ohio
216.522.1191
[email protected]
Lori A. Kalic, CPA
Director
Cleveland, Ohio
216.522.1478
[email protected]
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Agenda
What are the Standard Setters Up To?
Revisiting Recently Issued Standards
FASB
GASB
What is On the Horizon?
Other Standards
Q&A
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What are the Standard Setters Up To?
International Convergence
Principle-based vs. Rule-based
Focus is on publically traded companies
Fallout is inevitable – we see it in proposed standards
Financial Accounting Foundation
Blue Ribbon Panel – Trustee Working Group
Made two key recommendations
1. GAAP should have exceptions and modifications for
private companies
2. Exceptions should be determined by a separate private
company accounting standards board
– It did not recommend separate GAAP
– Next step is for the TWG to perform assessment
FASB Not-for-Profit Advisory Panel
Codification
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Revisiting Recently Issued Standards
Accounting Standards Update 2010-07
“NFP Mergers and Acquisitions”
Accounting Standards Update 2009-12
“Fair Value Measurements and Disclosures –
Using NAV”
Accounting Standards Update 2010-06
“Fair Value Measurements – Improving
Disclosures and Measurements”
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Accounting Standards Update 2010-07
“Not-for-Profit Entities: Mergers and Acquisitions”
Issued April 2009
Formerly known as FAS 164
Effective for mergers on or after the beginning of the
initial reporting period beginning on or after
December 15, 2009
Effective for acquisitions for which the acquisition
date is on or after the beginning of the first annual
reporting period beginning on or after December 15,
2009
Objective of the Statement is to improve relevance,
representational faithfulness, and comparability of
the information that an NFP entity provides in its
financial reports about a combination with one or
more NFPs, businesses, or nonprofit activities
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Accounting Standards Update 2010-07
“Not-for-Profit Entities: Mergers and Acquisitions”
Established principles and requirements for
how a NFP:
Determines whether a combination is a merger or
an acquisition
Applies the carryover method in accounting for a
merger
Applies the acquisition method in accounting for
an acquisition, including determining which of
the combining entities is the acquirer
Determines what information to disclose to
enable users of financial statements to evaluate
the nature and financial effects of a merger or
acquisition
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Accounting Standards Update 2010-07
“Not-for-Profit Entities: Mergers and Acquisitions”
Merger
Governing bodies of two or more NFPs cede
control to form a NEW NFP entity
Carryover method used
Need not be a new legal entity
Acquisition
NFP acquirer obtains control of one or more
nonprofit activities or businesses (SOP 94-3)
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Accounting Standards Update 2010-07
“Not-for-Profit Entities: Mergers and Acquisitions”
Disclosures – Merger and Acquisitions
Very robust disclosures for both types of
transactions and additional disclosures for
“public entities”
Refer to the ASC when dealing with a merger or
acquisition under the new rules
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Accounting Standards Update 2009-12
“Investments in Certain Entities that Calculate Net Asset Value per Share”
Issued in September 2009 – Effective periods
ending after December 15, 2009
Guidance on how entities should estimate FV
of certain alternative investments.
If investments are within scope of the
guidance – Net Asset Value (NAV) can be
used as a practical expedient to determine FV
if the NAV is as of the measurement date
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Accounting Standards Update 2009-12
“Investments in Certain Entities that Calculate Net Asset Value per Share”
Investments within the scope:
There is no readily determinable FV
An entity that has the following attributes:
– Primary activity is investing
– Ownership is represented by units of ownership (i.e.
partner interests or shares of stock)
– The funds within the investment are pooled
– The entity is a primary reporting entity
An investment that does not possess one or more
of these attributes but it is industry practice to
issue financials on FV basis
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Accounting Standards Update 2009-12
“Investments in Certain Entities that Calculate Net Asset Value per Share”
ASU permits use of NAV as a practical
expedient – Subject to any pending sales (on
an investment by investment basis)
Expands disclosures “by major category” to
include the following:
Nature of any redemption frequency and any
restrictions
Unfunded commitments
Investment strategies of the investees
** The expanded disclosure is required for alternative
investments regardless of whether NAV is used.
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Accounting Standards Update 2009-12
“Investments in Certain Entities that Calculate Net Asset Value per Share”
Impact to Fair Value Disclosure
If entity can redeem investment at NAV on the
measurement date – Level 2
If entity can never redeem its investment at NAV –
Level 3
If redeemable at an unknown time in the future –
Judgment is required
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Accounting Standards Update 2010-06
“Fair Value Measurements and Disclosures”
ASU 2010-06 – issued in January 2010
Topic 820 changes – “Improving Disclosures
about Fair Value Measurements”
Effective for interim and annual periods
beginning after December 15, 2009, except for:
The disclosures about purchases, sales,
issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements. Those
disclosures are effective for interim and annual
periods beginning after December 15, 2010.
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Accounting Standards Update 2010-06
“Fair Value Measurements and Disclosures”
New Disclosures
Significant transfers in and out of Level 1, 2 and
Level 3 should be separately disclosed as well as
the reasons for the transfers
– Transfers in should be separate from transfers out
– Required to disclose policy about the timing of
recognizing a transfers (i.e. beginning of period, end of
period, or date of event creating the transfer)
For Level 3 activity, a reporting entity should
present separately information about purchases,
sales, issuances, and settlements on a gross (vs.
net) basis. (Years beginning after 12/15/10)
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Accounting Standards Update 2010-06
“Fair Value Measurements and Disclosures”
Existing Disclosures “Clarified”
Level of disaggregation for each “class” of assets
and liabilities carried at fair value based on
judgment
A reporting entity should provide disclosures
about the valuation techniques and inputs used to
measure fair value for both recurring and
nonrecurring fair value measurements for Level 2
and 3 items
Conforming amendments for employers’
disclosures related to postretirement benefit
plans
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Accounting Standards Update 2010-06
“Fair Value Measurements and Disclosures”
Examples of Disaggregation
Equity securities by industry
– i.e. real estate, healthcare, consumables
Debt securities by grade or type
– i.e. commercial, residential, US treasury, corporate
ratings
Hedge fund investments by position
– i.e. long/short, global vs. domestic, distressed debt
Other important point
The fair value disclosure by class should
reconcile back to the line items in the statement of
financial position (balance sheet)
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Example Disclosure
Level 1
Common stock
Basic industry
Capital goods
Consumer staples
Energy/utilities
Financial
Technology
Bonds:
U.S. Government
Corporate (1)
Foreign (1)
Mutual funds
Equity index funds
Small-cap growth funds
Small-cap value funds
Mid-cap growth funds
Foreign large-cap value funds
Fixed income bond funds
Short-term bonds
Intermediate-term bonds
International equity
Domestic (2)
Benefical interests in perpetual trusts
Alternative investments
Cash and cash equivalents
Accrued interest
$
Level 2
1,520,383 $
1,970,054
2,488,723
2,291,755
2,192,241
2,784,575
-
Level 3
- $
-
23,254,991
8,312,778
2,297,523
Total
- $ 1,520,383
1,970,054
2,488,723
2,291,755
2,192,241
2,784,575
-
456,600
1,555,999
2,333,699
501,725
800,050
6,000,871
326,362
1,246,950
119,730
2,411,707
891,955
17,421
203,661
$ 25,342,767 $ 37,541,370 $ 1,095,616
23,254,991
8,312,778
2,297,523
456,600
1,555,999
2,333,699
501,725
800,050
6,000,871
1,573,312
2,531,437
891,955
221,082
63,979,753
11,009,926
269,307
$ 75,258,986
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Accounting Standards Update 2010-06
“Fair Value Measurements and Disclosures”
Why?
To meet the needs of users of the statements
More transparency with disaggregated
information
The reasons behind changes in Level 3 items (vs.
net information that leaves them guessing)
Also feel information about transfers in and out of
the Levels (1, 2, and 3) and the reasons for them
would be “helpful”
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Government Accounting Standard No. 51
“Accounting and Financial Reporting for Intangible Assets”
Effective Date: For periods beginning after June
15, 2009
Why?
Establish consistency in financial reporting derecognition,
initial measurement, and amortization
Applicable to intangible assets, as defined in
GASB 34
Capitalization is required for eligible tangible
assets i.e. identifiable
Specific guidance regarding internally generated
computer software
Provides guidance surrounding amortization
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Government Accounting Standard No. 53
“Accounting and Financial Reporting for Derivative Financial Instruments”
Effective date: For periods beginning after
June 15, 2009
Recognition, measurement and disclosure
associated with derivative instruments
Requires fair value reporting (limited
exceptions)
Investment derivative instruments vs.
hedging derivative instruments
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Government Accounting Standard No. 55
“The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments”
Effective upon issuance
Incorporate GAAP hierarchy into GASB
authoritative literature
Result: improve financial reporting
Codification
No real change to existing practice
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Government Accounting Standard No. 56
“Codification of Accounting and Financial Reporting Guidance Contained in the AICPA
Statements on Auditing Standards”
Effective upon issuance
Purpose: To incorporate into GASB literature
financial reporting guidance surrounding:
Related party transactions
Going concern considerations
Subsequent events
Does NOT establish new standard but
incorporates existing guidance
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Government Accounting Standard No. 58
“Accounting and Financial Reporting for Chapter 9 Bankruptcies”
Effective date: For periods beginning after June
15, 2009.
Retroactive application is required for all prior
periods presented during which a government
was in bankruptcy.
Accounting and financial reporting guidance for
governments that have petitioned for protection
from creditors by filing for bankruptcy under
Chapter 9 of the United States Bankruptcy Code.
It requires governments to remeasure liabilities
that are adjusted in bankruptcy when the
bankruptcy court confirms (that is, approves) a
new payment plan
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What is On the Horizon?
Leases (2nd Quarter 2011**)
Revenue recognition (2nd Quarter 2011**)
Financial Instruments (3rd Quarter 2011**)
Fair Value Measurements (2nd Quarter 2011)
Consolidation (2nd and 3rd Quarter 2011)
Financial Statement Presentation (Undefined)
** FASB will issue amendments for comment prior to
finalizing standards
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Lease Accounting – Status
FASB issued Proposed Accounting Standards
Update for Leases (Topic 840) on August 17, 2010
Comment period expired on December 15, 2010
The proposed ASU has garnered much attention at
this stage
Insiders say it is a given that these changes are
coming
Most existing leases are not grandfathered
Target date is Q2 – 2011
Effective date – yet to be determined – 2013/14?
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Lease Accounting – General Provisions
With few exceptions, operating leases are
going away.
“Right-of-use” model:
Lessee would recognize an asset for its “right to
use” the underlying asset for the lease term and
recognize a liability to make lease payments.
Lessor would recognize an asset representing its
“right to receive” lease payments and depending
on certain factors would either recognize a lease
liability for its performance obligation, or
derecognize the rights in the underlying assets
that it transfers but continue to carry a residual
asset at the end of the lease term.
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Lease Accounting – Lessee Accounting
Initial measurement
Asset = PV of lease payments plus direct costs
Obligation = PV of lease payments discounted at
lessee’s incremental borrowing rate
Subsequent measurement
Asset – amortized cost – straight line method
Obligation – amortized cost – effective interest
method
Required to consider impairment
Assess carrying amount of liability as warranted
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Lease Accounting – Lessor Accounting
Performance Obligation vs. Derecognition
Approach
Performance Obligation- Lessor retains exposure
to significant risks and benefits
Derecognition Approach – Lessor does not retain
exposure
– Asset = PV of lease payments plus direct costs
– Obligation = PV of lease payments discounted at
lessee’s incremental borrowing rate
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Lease Accounting – Lessor Accounting
Performance Obligation
Initial measurement
– Determine lease payment using expected outcomes
approach
– Discount using rate lessor charges the lessee
– Include contingent/option payments (be conservative)
Subsequent measurement
– Amortize asset – interest method
– Amortize performance obligation – systematic approach
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Lease Accounting – Lessor Accounting
Derecognition Approach
Initial measurement
–
–
–
–
Considered to have sold a right to use asset
Derecognize a portion of the underlying asset
Recognize an asset for the residual benefit not
transferred
Recognize a lease receivable, revenue and COGS
Subsequent measurement
–
–
Residual asset is not remeasured unless lease term
changes or becomes impaired
If lease term increases – residual asset will decrease
and vice versa
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Lease Accounting – General Provisions
Lease term assumes the longest possible term
that is more likely than not to occur (options)
Expected outcome technique to reflect the lease
payments including contingent rentals, term
option penalties and residual guarantees
Assets/liabilities updated in the period when there
is a significant change to the relevant factors
such that there is significant economic incentive
to exercise or terminate the lease
Service component of the lease excluded in
evaluating the payments to be made
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Lease Accounting – General Provisions
Simplified requirements for leases of 12 months
or less
Enhanced disclosures around these assumptions
Biggest change to lease accounting in 34 years
Still considerable debate on the following:
Expense recognition pattern for lessees
Lease term and options
Contingent payments
Lessor accounting
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Lease Accounting – Proposed Update (Cont.)
Discussion/Issues the Standard Creates
Obligation now in the financials vs. notes for operating
leases
Bank covenant issues
Estimation process for lease term extensions,
contingent rentals, effective interest rates, etc.
Adoption issues
Evaluation of impairment of the asset
Payments on the obligation will be reflected as financing
activities in the SOCF.
Performance obligation vs. derecognition approach
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Revenue Recognition
Objective is to provide one common revenue recognition policy
(simplification)
4 step model:
Identify contract
Identify performance obligations
Allocate transaction price
Recognize revenue as obligation is satisfied
Performance obligations would be separated from goods and
services
Variable and contingent fees would be included in transaction
price
Initial estimate of uncollectible amounts would reduce revenue
Allocation of transaction price to multiple performance
obligations
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Accounting for Financial Instruments and Revisions
to the Accounting for Derivative Instruments
Requires organization to present amortized cost and
FV about financial instruments held for collection or
payment of cash flows
Exception if <50% of assets are measured at FV –
Will not help higher education
Potential Impact to Higher Education
Loans receivable (amortized cost)
Debt
Split interest liabilities
Continues deliberation
Once effective – non publics with < $1B in assets will
have additional 4 years to adopt
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Accounting for Financial Instruments and Revisions to
the Accounting for Derivative Instruments
Financial Instruments
Use of equity method would be restricted; otherwise equity
investments would be carried at FV
Classification of financial assets based on business strategy
– FV-NI – Fair Value, Net Income
•
Strategy is trading or holding for sale
– FV-OCI – Fair Value, Other Comprehensive Income
•
Strategy is managing risk and maximizing total return
– FV-AC – Fair Value, Amortized Cost
•
Strategy is collection of contractual cash flows
– Reclassifications would be prohibited
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Fair Value Measurements - Amendments
Objective is to clarify meaning of FV between
international and GAAP standards
Clarify definitions related to measuring FV
Highest and best use and valuation premise
Measuring FV of an instrument in net assets
Measuring the FV of financial instruments in a
portfolio
Application of blockage factors and other
discounts and premiums in a FV measurement
Additional disclosures
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Consolidation
Objective is to provide comprehensive
guidance.
Basis for consolidation will be “control”
Power to direct the activities of another entity
Ability to benefit from that power
Power exists if ability to direct activities impacts
the entities returns
Can also have contractual control (i.e. voting
rights)
Investment companies are excluded
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Financial Statement Presentation
Operating, investing and financing for all
statements
Disaggregating information into material
classes of useful information
Direct method cash flow statement
Substantial disclosure for remeasurements in
the financials.
Provide segment disclosures
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Government Accounting Standards
Statement No. 59
“Financial Instruments Omnibus”
Effective: Periods beginning after June 15, 2010
Objective: Update and improve existing standards
regarding financial reporting and disclosure
requirements of certain financial instruments and
external investment pools for which significant
issues have been identified in practice
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Government Accounting Standards
Statement No. 60
“Accounting and Financial Reporting for Service
Concession Arrangements”
Effective Date: Periods beginning after December 15, 2011
Reporting service concession arrangements (SCA) i.e. an
arrangement between a transferor (a government) and an
operator (governmental or nongovernmental entity) in which
the transferor conveys to an operator the right and related
obligation to provide services through the use of
infrastructure or another public asset (a “facility”) in
exchange for significant consideration and
the operator collects and is compensated by fees from third
parties.
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Government Accounting Standards
Statement No. 61
“The Financial Reporting Entity: Omnibus—an
amendment of GASB Statements No. 14 and No. 34”
Effective Date: Periods beginning after June 15,
2012 Earlier application is encouraged
Modifies certain requirements for inclusion of
component units in the financial reporting entity
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Government Accounting Standards
Statement No. 62
“Codification of Accounting and Financial Reporting Guidance
Contained in Pre-November 30, 1989 FASB and AICPA
Pronouncements”
Effective Date: Periods beginning after December
15, 2011.
Established to incorporate into the GASB’s
authoritative literature certain accounting and
financial reporting guidance that is included in
certain FASB and AICPA pronouncements issued
on or before November 30, 1989, which does not
conflict with or contradict GASB
pronouncements.
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Questions?
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